Zimbabwe bites back

Last month’s announcement that UK inflation had risen to 4% prompted unease about the country’s fragile economy and criticism of the Bank of England’s interest policy. In Zimbabwe, normal trading was almost impossible by the end of 2008 due to the incredible rate of inflation, calculated by one report to be at an annualised percentage rate of 6.5 quindecillion novemdecillion – that is to say 6.5 followed by 107 zeros.

In February 2009, the acting minister of finance legalised pricing and payment in foreign currencies. Currency transactions split into two kinds: actual folding money was used for most transactions large and small, while money ‘in the bank’, which could only be moved by transfer was used for large transactions, tax settlement and investment activities.

Money was being ‘printed’ for both methods, but at different speeds. For the cash market, banknotes eventually reached a denomination of 100 trillion ‘Zim’ dollars. The central bank could ‘print’ money by simply writing a journal entry indicating that money had been transferred. This situation allowed Zimbabwe to achieve such a mind-boggling level of inflation. Price controls were introduced without any attempt to address the cause. The result was that the shops emptied and formal business ground to a halt.

So where are we now? Zimbabwe now has a government of national unity. This marriage of inconvenience does not work well politically, but the related infighting and bickering largely means that there is limited government interference in business and so recovery is taking hold.

GDP growth last year was about 8.5% and may increase in 2011. The introduction of foreign currencies has removed the government’s primary instrument with which it could abuse the economy: printing money can no longer be used to reallocate wealth from the productive to the parasitic.

The shops are full of local and imported goods, there is fuel in the filing stations and prices are largely stable. The stock exchange has grown fourfold in US dollar value and brave early investors have made handsome real gains.

April 2011.

Download the full article (PDF: 159.17/2 pages).

The author of this article is a member of the Global Accounting Alliance working in Zimbabwe.

ICAEW is working with local bodies around the world to help build capacity in the financial and accounting sectors. For details, call Mark Campbell on +44 (0)20 7920 8448.